Guide to cashback credit cards

Key points

Earn cashback every time you spend on your plastic, subject to the terms of each card

Pay off your balance in full every month to make the most of your card

Interest rates on unpaid balances can be high and may outweigh rewards

Beware of annual fees

You're likely to require a good credit score to qualify - try a soft search to check your odds

Wouldn't it be great if someone paid you to shop? If you could earn money every time you fill up your car or bring home the groceries?

Well, with cashback credit cards, that's what could happen.

Cashback cards allow the holder to earn back a percentage of what they spend as an annual bonus.

Some have even been known to pay as much as 5%, so they can be a great way to make a little extra cash.

Just make sure that you're also aware of the pitfalls...

How do cashback credit cards work?

As the cardholder shops using the card, they accumulate a percentage of money back.

Quite often it's between 1% and 3%, but every card is different so use a site such as Gocompare.com to review your options.

The plus side is that, if you use one of these cards for your day-to-day and/or big-purchase spending and pay it off each month, then you could build up a real bonus throughout the year.

You usually receive your money once a year, typically as a credit to your account.

But remember, you need to be confident that you can clear your balance in full each month, or the interest you pay will soon outstrip the money you earn.

Cashback card availability and amounts

On 13 November, 2014, Gocompare.com checked the 249 credit cards listed on the matrix of independent financial researcher Defaqto and found that the number of cards offering cashback were relatively small compared with other types of reward scheme.

Only 22 cards allowed customers to earn cashback, while 40 cards offered air miles, 29 had a shopping reward programme and 47 had a points scheme.

Standard cashback amounts varied between 0.25% and 2%, although some cards had introductory bonuses or increased cashback with certain retailers.

Of the 22 cashback cards checked some had an introductory cashback amount of 5% and others offered cashback of up to 15% with certain retailers.

What are the downsides?

These types of cards are all slightly different, so you need to read the small print carefully.

Challenges facing the cashback card market

Securing attractive cashback and rewards cards may prove increasingly challenging in the future following European Union regulation on the issue of Interchange Fee Regulation.

This has meant an EU-wide cap on the charges paid by a business when a customer pays for something using a card. Since 9 December, 2015, the fees banks can charge has been capped at 0.30% and 0.20% for credit and debit card transactions respectively.

The government would like to see this benefit for businesses passed on to consumers in the form of lower prices, Chancellor George Osborne saying in July 2015 that the government is "determined to tackle the unfair fees that Britain's businesses are often charged when their customers pay by card - fees which are often passed on to consumers".

However, such benefits for consumers are expected to have a knock-on effect on the cashback and rewards card market.

"Caps on charges are generally good news for consumers," said Gocompare.com's Matt Sanders. "But what many people may not realise is that interchange fees have funded the majority of customer perks such as cashback schemes and points incentives. The charging caps could spell the end for those schemes.

"Also, interchange fees are charges to businesses and - although the chancellor has suggested he'd like to see any saving passed on to consumers - there's no guarantee that this change will result in lower prices.

"Some retailers may simply use the cap to boost their margins. If this were to happen, banks would lose, businesses would win and consumers would see little change except, perhaps, a poorer choice of card-based incentive schemes.

"One thing we've also come to expect from banks is that they don't take losing lying down. If they have to give up revenue from credit and debit card transaction fees, they'll want to make it up elsewhere, so don't be surprised if consumers ultimately pick up the bill for this legislation."

By Felicity Hannah

[1]Gocompare.com introduces customers to Lovemoney.com Financial Services Limited which is authorised and regulated by the Financial Conduct Authority. Gocompare.com's relationship with Lovemoney.com Financial Services Limited is limited to that of a business partnership, no common ownership or control rights exist between us. Please note, we cannot be held responsible for the content of external websites and by using the links stated to access these separate websites you will be subject to the terms of use applying to those sites